Behind the eye-catching headlines of trade wars, rising interest rates and market sell-offs, tobacco stocks have quietly tracked higher. Although investing in this sector isn't for everybody, it's worth taking a look at what's lighting these stocks up.
In September, the Food and Drug Administration (FDA) threatened to remove e-cigarettes – an alternative to traditional cigarettes that don't burn tobacco – from shelves if manufacturers don't take preventative measures to curb widespread teenage use. The regulatory body has ordered five e-cigarette manufactures – Juul, Vuse, MarkTen, Blu E-cigs and Logic – to submit proposals on how they plan to prevent teenagers from using their products.
Investors have welcomed a regulatory clampdown on e-cigarettes, as they directly threaten tobacco companies' sales. "Given that big tobacco has yet to find a productive way to meaningfully compete against Juul, an FDA decision to pull flavors from the market would be a notable positive," Vivien Azer, a research analyst at Cowen & Co., told Barron's.
Investors who wish to invest in the tobacco sector should consider these three leading stocks in the space. Below, we analyze suitable entry points.
Altria, headquartered in Richmond, Virginia, manufactures and markets cigarettes, cigars, smokeless products and wine. The company's Marlboro brand accounts for 40% of all cigarettes sold in the United States. Altria also holds a 10.2% stake in Anheuser-Busch InBev NV (BUD), the world's largest brewery, which owns global brands such as Budweiser and Corona. Altria pays a dividend yield of 4.86% and has a market capitalization of $123.77 billion. The company's stock is up 12.94% over the past three months and has a year-to-date (YTD) return of -6.47% as of Oct. 31, 2018.
Altria's share price made an eight-month high on Oct. 30. Volume has risen steadily over the past five trading sessions, suggesting buying interest in the stock. The 50-day simple moving average (SMA) has recently crossed above the 200-day SMA in what technical analysts refer to as a "golden cross" – a bullish signal that indicates a long-term trend reversal. Instead of chasing the stock, investors should wait for retracements back to the $61 level – this price area finds solid support from the uptrend line and 50-day SMA that connects multiple swing lows.
New York-based Philip Morris, with a market cap of $140.64 billion, is one of the world's leading tobacco companies. It was the operating company of Altria until a spin-off in 2008. Through its subsidiaries, the company manufactures and sells cigarettes and nicotine-related products. Key brands in its portfolio include namesake Philip Morris, Marlboro and Chesterfield. As of Oct. 31, 2018, Philip Morris stock has a YTD return of -11.21% but has performed strongly over the past three months, returning 7.17%. Investors also receive an attractive 5.04% forward dividend yield.
Philip Morris shares have staged an impressive six-week rally that recently surpassed the April 19 gap candlestick high of $89.94. The company's stock price is currently approaching a resistance level created from the February and March swing lows. Investors should look for an entry point at the $85 level, where the stock is likely to find a confluence of support from a horizontal trendline, the 200-day SMA and the uptrend line that dates back to early September.
Also headquartered in Richmond, Virginia, Universal supplies leaf tobacco globally. The company procures, processes, packs and ships the product, which it then sells to tobacco manufacturers. Universal generates three-quarters of its revenue from outside North America. Trading at $68.98 with a dividend yield of 4.35% and a market cap of $1.72 billion, the stock is up an impressive 36.34% YTD, far exceeding the -15.79% tobacco industry average return over the same period as of Oct. 31, 2018.
The wide-ranging candlestick that printed on May 24 – the day Universal impressed the market with its fiscal fourth quarter earnings – stands out as a game changer on the company's stock chart. Apart from a 19% pullback in mid-August, the stock has continued to grind higher. Investors who are looking to buy the stock could enter on a pullback to the uptrend line support area at $66. Alternatively, those who are more aggressive could buy on a breakout on above-average volume above the $69 resistance level.